In 2015, we have seen several important cybersecurity breaches
in the industry. Some of them have been extensively mediatized
while others remained less known by the general public. Recently,
the online dating website Ashley Madison was hacked and the
identity of millions of users revealed all around the world. Even
more recently, we learned that over 500 million users' Yahoo
accounts had been hacked in 2014 and this news came out shortly
after the acquisition of Yahoo by telecom giant Verizon. Can these
attacks jeopardize your upcoming transaction? They absolutely can.
As a matter of fact, Verizon asked for a $1 billion discount off
its initial offer of $4.8 billion to acquire Yahoo and just
recently said that it has a reasonable basis to believe that the
massive data breach of email accounts represents a material impact
that could allow Verizon to withdraw from the deal. The burden
seems to now be on Yahoo to demonstrate the full impact of the
breach.

These attacks raise an important question: are companies aware
of the importance of conducting thorough cybersecurity due
diligence in their M&A transactions? Here are a few tips that
could be helpful when it comes to assessing the cybersecurity risk
of a targeted company:

Do not wait until the end of
your due diligence. Start assessing the risk at the earliest stage
of the due diligence process. It is important to ask the
target what its most important and useful IT systems are and the
most common risk associated with them. Are they covered by complete
and extensive IT policies? Are they regularly updated and evaluated
by IT experts? Those are examples of questions that need to be
asked while conducting your IT due diligence.

Know exactly the most
important systems that need to be considered. Since due
diligence in cybersecurity can be very expensive for the buyer, it
is important to identify what systems or technologies are most at
risk of being subject to a cyber-attack. By tailoring your risk
assessment, you are controlling the cost while making sure to
investigate the proper systems with a higher risk of being hacked
that will endanger the success of your transaction.

Do not engage in any
cybersecurity risk assessment if your company does not have
internal IT experts or extensive knowledge in this area.
It is no easy task when it comes to estimate the cost of a
potential cybersecurity problem within the target's systems.
Not only is it important to discover such problems but it is also
very important to be able to evaluate how such problem could
negatively impact the transaction and what the best way to fix
those problems is, before engaging in further discussions or
negotiations. If your company does not have the internal team to
proceed with the cybersecurity due diligence, you should consider
retaining the services of external IT specialists.

Consider the importance of
obtaining cyber insurance. Since cyber-attacks can be
highly expensive for a company, the importance of cyber insurance
(not only in the specific context of an M&A transaction) is
rising for many companies throughout the market. According to an IBM survey conducted in 2016, the average cost
of a data breach reached $6.03 million this year, which represents
a 12.5% increase compared to 2015. The software-maker McAfee
estimated that the total cost of cybercrime in the global economy
can reach up to US$575 billion per year. The costs are high and
most of the time very difficult to estimate so that is why
companies should consider having cyber insurance in order to
protect themselves from such costs and uncertainty. Cyber insurance
policies can cover a wide range of risks from network security
liability to regulatory defense and penalties and network
extortion.

The author would like to thank Vincent Belley, articling
student, for his assistance in preparing this legal
update.

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